Preparing to Thrive When Stagflation Strikes

Preparing to Thrive When Stagflation Strikes

Bob Prince, co-CIO of Bridgewater Associates (the world’s most successful hedge fund), has a very thought-provoking article published recently on Financial Times. He’s joined the chorus of analysts, central bankers and everyday folks convinced that the global economy is teetering on the brink of, or already toppled over the edge of, a stagflationary precipice.

That’s truly bad news. Even worse, most Americans saving and investing today simply haven’t seen an economy wracked by stagflation. They don’t know what to expect, or how to prepare.

Fortunately, Prince has some actionable suggestions.

What is stagflation?

Stagflation is a toxic brew of high inflation and economic stagnation (stagnation + inflation = stagflation). Normally, these two fiscal forces strike at different times. High inflation is typically a symptom of a booming economy and a tight labor market. Stagnation, on the other hand, a period of low-to-negative economic growth, usually co-exists with low inflation and high unemployment. Stagflation is the worst of both economic conditions.

Prince describes stagflation like this:

a high level of nominal spending growth cannot be met by the quantity of goods produced, resulting in above-target inflation. Policymakers are not able to simultaneously achieve their inflation and growth targets, forcing them to choose between the two.

Fortunately, stagflation is a relatively unusual phenomenon.

Unfortunately, it’s also the correct way to describe some of the worst economic episodes in American history, including the Great Depression.

Why is stagflation a fait accompli?

Because worldwide economies are weakening, slowing due to a combination of factors:

  • Ongoing Covid lockdowns (especially in China)
  • Supply chain disruptions
  • Russia’s invasion of Ukraine and Western financial sanctions in response
  • Massive, global deficit spending in the early stages of the pandemic panic

These forces have fueled global inflation. Prices are surging at 41-year record levels in the U.S. Canada isn’t far behind. The Euro zone is seeing the highest inflation since its inception in 2001.

Global central banks are slowly responding to rising prices by raising interest rates, in an effort to “cool down” overheating economies. However, it’s already too late. Yes, the global economy was overheating — but ran out of gas about the same time central banks started hitting the brakes.

Subsequently, instead of slowing the economy smoothly to cruising speed, it’s looking more and more like the global economic system will shudder to a full stop (or possibly shudder and shimmy along like a beginner learning to drive a car with a manual transmission).

Here’s what Bridgewater recommends to preserve our savings

To begin with, Prince warns us, everything we thought we knew about investing is wrong:

Historically, equities have been the worst-performing asset in stagflationary periods, because they are vulnerable to both falling growth and rising inflation. Other predominantly growth-sensitive assets like credit and real estate also perform poorly.

Well, what about bonds, the historical counterweight to risky equities?

Nominal bonds are closer to flat in such environments. This reflects the cross-cutting influences of falling growth that typically leads to easing and falling rates, weighed against rising inflation expectations which usually put pressure on rates to rise. As rates increase generally, the yields on existing bonds can appear less attractive, pushing prices down.

“Close to flat” isn’t what we want, especially when “flat” means “negative after inflation.”

If that’s what doesn’t work, then what does?

Inflation-linked bonds and gold perform the best, with the former benefiting from both weak growth and rising inflation… index-linked bonds, gold, and commodities giving investors better relative returns regardless of how policymakers respond.

Just for historical comparison purposes, gold’s price rose 400% over just four years during the last episode of stagflation in the U.S. (1971-1975). There’s a reason investors and central banks around the world rely on gold. Gold’s historical track record as a safe-haven investment deserves scrutiny.

Gold’s Summer Price Performance and the Prism of Uncertainty

Golds Summer Price Performance and the Prism of Uncertainty
Shopping for gold now, before the price goes up…
Public domain image by Joseph Hendricks, U.S. Navy

It’s tradition to remind gold investors that summer is the weakest quarter in the year for the metal. Lackluster performances in June, July and August tend to be the norm.

Yet an analysis on Seeking Alpha highlighted why this year, gold’s summer woes could easily end with a tepid June.

Gold often outperforms even during its worst quarter

As the analysis notes, it’s not unheard-of for gold to outperform during its worst quarter. That’s precisely what happened two years ago, as the metal moved to post a then-all-time-high of $2,070 in August.

While the analysis cites stock market panic as the primary reason, the truth is that broad uncertainty was by and large the real driver.

Let’s not forget that, traditionally, all financial markets are more thinly-traded in the summer. Wall Street flees the concrete canyons of Manhattan to sip single-malt Scotch in the Hamptons, or relocate to their summer homes on Nantucket and play sailboat on their yachts.

Financial markets don’t slow down, not exactly, but overall, volume tends to decline. Volatility, too, tends to be lower during the summer months (here’s a 20-year retrospective). Although there’s no obvious and pleasing pattern in the chart, volatility peaks tend to happen less often when so many traders are away from their desks.

Overall, volatility and gold’s price tend to be negatively correlated, albeit weakly. You’d expect a stronger negative correlation, wouldn’t you? Keep in mind, though, that old Wall Street saying, “In times of crisis, all correlations go to 1.”

So how’s this summer shaping up? Another snoozefest for gold?

It probably depends on inflation reports…

Are we one inflation update away from a new gold all-time high?

Today’s economic environment seems even more bullish for gold. May’s 8.6% CPI year-on-year increase marked the third consecutive month of what’s shaping up to be an inflation superspike. May’s report affirmed that, so far, there haven’t been any improvements. Rather the opposite.

Remember, the last two inflation superspikes both happened during  the 1970s, during the stagflation episode. Gold’s price tripled during the first bout, and quadrupled during the fourth.

The theme of inflation forcing the Federal Reserve to tighten monetary policy, and a subsequent train wreck in the stock market? That happened in the 1970s, too. So what’s different this time?

For starters, the benchmark interest rate back then was 13% compared to 1-and-a-fraction percent as it stands today. With that in mind, thinking of bonds as a credible alternative to gold would be outlandish.

The disparity in the rates further places into question what difference the Fed can make to stop inflation – without cranking the Effective Federal Funds Rate into double digits and above. (Just think of the howls we’d hear from Wall Street if that happened…)

The analysis points out that the current inflationary superspike isn’t likely to end until the dollar supply is normalized. In other words, you can’t inflate the money supply by 40% (this isn’t a joke, look at the chart) without expecting these kinds of consequences!

The Fed is trying to do this with tightening, but it’s already caused a recession in the U.S. and other nations, also playing catch-up, seem determined to do the same. From Australia to South Korea, Canada to the Euro zone, a global downturn seems nigh inevitable. (Many are already calling out Fed officials and saying that they’ll have to revert to an easy-money policy sooner rather than later – before even raising interest rates above 2%!).

Say the Fed does blink in the face of a stagnating economy – what prospect will be left besides hyperinflation? Recent polls showed that inflation is at the forefront of Americans’ minds and consumer confidence is low. It’s not clear what could bring a change of hearts.

All of this indicates a heightened demand for gold this summer. Wall Street may check out for the summer. Big traders may not be at their desks. But we seriously doubt that the average American family will be quite so complacent. With dollars buying less and less food and fuel month after month, we fully expect to see a broad-based surge of interest in gold as the inflation-resistant investment par excellence.

Don’t be surprised if the lowest days of gold’s price are behind us. We don’t expect this to be a quiet summer for the gold market.

Even Legendary Stock Bull Jim Cramer Recommends Gold These Days

Even legendary stock bull Jim Cramer recommends gold these days. Creative commons image via Wikimedia.

As if investors needed any more reminding about economic conditions, CNBC’s Jim Cramer recently recommended Americans diversify with gold in one of the network’s financial features. Cramer, whose show mostly covers the stock market, said he likes gold as one of only three assets in a recession. The other two?

Well, honestly they’re a little less accessible to the average American… “Masterwork paintings” and, well, there’s just no other way to say this, “incredible mansions.”

The almost ridiculous nature of the other two items on the list tells us a few things. It seems that Cramer, like many others, views gold as the only asset one can truly fall back on during times of crisis. Consider for a moment the liquidity of “masterwork paintings,” or the wisdom of the time-honored phrase “One man’s trash is another man’s art.” What defines a painting as a “masterwork,” exactly?

Or how often does an “incredible mansion” go up for sale? What qualifies it as “incredible” rather than, say, an everyday “mansion”?

Finally, just how easy are these tangible assets to buy and sell?

Of Cramer’s three recommended assets, only physical gold is fungible, liquid and (most importantly) accessible to everyone. It’s also a lot easier to recognize than “masterwork” or “incredible” investments.

What’s the best way to own gold? Cramer doesn’t recommend an ETF or mining shares:

Physical gold is the cheapest way to do it.

This recommendation didn’t come a moment too soon, either… What could have been considered a “consumer crisis” in the form of four-decade-record inflation has now come for stock market investors – in a big and brutal way. As of last Monday, the S&P 500 officially entered a bear market, although it was only a formality given its 20% year-to-date losses.

So long as the stock market is performing well, it’s as if there is no trouble. We can, for example, ignore an 8.6% inflation rate that is rising past 40-year highs despite Federal Reserve policy tightening. But when trouble hits stocks, it’s panic time.

Cramer’s wording is telling enough, as he does seem to acknowledge that we are either in, or headed towards, a recession. For as many analysts, experts and banks that we can find cautioning against an extreme risk of recession, there are almost as many going the other way. It won’t take long to find a forecast that dismisses the notion of a recession entirely or otherwise says a crisis will be short-lived.

It begets the question: what exactly is needed for someone to ring the recession bells? Businesses were hammered by lockdowns and only kept up by monetary stimulus that has now dissipated. The same holds true for large, publicly-traded companies. The stimulus-ending crash is actually worsening what would have been a “natural” correction of the longest bull market in stock history.

Then we get to inflation. The Federal Reserve’s only stated way of bringing inflation back to 2% territory would be to cartoonishly increase the nominal interest rate, as with any other central bank. Inflation is, after all, a global theme. It just so happens that the U.S. government has a $30 trillion debt, on which it has to pay interest. The larger the interest rates, the greater the debt payments. The same holds true for corporate and private debt.

We are three years into a crisis, but we are reaching the territory where Wall Street, central banks, private banks and the like can no longer look away. Their preferred method of dealing with financial crises, or the only method ever utilized, was bailouts. That’s how 2008 was swept under the rug.

Yet the bailout already happened early on into this crisis, with $4.6 trillion being “produced” to pretend like nothing’s happening. The bailout worked in 2008, but it has clearly failed this time around. We again find ourselves in uncharted territory.

In the 1970s, interest rates were 13% (compared to today’s 1.5%). That’s why the hiking approach somewhat worked. In 2008, inflation was near the 2% target, rather than above the 40-year high of 8.6%. That’s why the money-printing approach somewhat worked.

It shouldn’t be surprising to hear that Cramer likes the only asset proven to hold its ground in any situation, along with large houses full of nice paintings.

Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

The current geopolitical environment highlights the many reasons gold can thrive in any scenario. It’s a reminder to the attentive investor why gold has been the financial hedge of choice throughout recorded history. Let’s examine how gold compares with other assets when market volatility, recession, geopolitical conflict and inflation are all risks that are either on the horizon, or have already materialized.

Gold vs. “digital gold”

Bitcoin has emerged to prominence for several reasons, not the least of which is its fixed-supply cap. In January, the CPI saw its fastest monthly rise since 1982, exceeding already-pessimistic inflation expectations. Investors and even those who have previously had little to no interest in actively managing their savings are growing wary of currency depreciation. In other words, as time passes, each dollar buys noticeably less. A quick glance makes a fixed-supply asset look very appealing when trillions of dollars are being printed.

Yet, in a recent note, Goldman Sachs’ analysts called bitcoin a “risk-on inflation hedge” and gold a risk-off inflation hedge. The top crypto is, for better or for worse, infamously volatile, having recently shed 50% from its November high. With clear signals of a growth slowdown and worries over a recession, the team views a long gold position as the best way to protect oneself against market downturns. Recent history has indicated that, while bitcoin and other cryptocurrencies have tremendous growth potential, their astonishing volatility is all-too-tightly correlated with speculative, “risk-on” investments. By this measure, bitcoin isn’t a suitable hedge.

Gold as the investment of last resort

It seems that traders are equally concerned and unconcerned about a conflict between Russia and the West, the latter by proxy via Ukraine. Some estimate an only 10% chance of a true shots-fired escalation. Nevertheless, there has been no shortage of scrambling among traders. Any conflict would make riskier investments, such as equities, vulnerable to a market rout. So what are some of the options traders are exploring to cover their bases?

With the cost of defensive assets going up, investors are betting on everything from French and German stocks to safety in the U.S. dollar and the yen. But one hardly needs reminding that the stock market can never really offer protection. And in the face of the highest inflation in decades, is hedging with paper currencies really a good idea?

Roberto Lottici, fund manager at Banca Ifigest in Milan, has minimized both cost and exposure to risk by doubling the gold and silver allocation of his fund to 6%. It’s a percentage many would find conservative even in the absence of huge red flags. Nonetheless, to Lottici, it’s enough to offer peace of mind in whatever scenario unfolds.

“If the situation spirals out of control,” said Lottici, “then it’s going to be one of the very few assets that can offer protection.”

That’s just the thing with gold, though: even if the Russia-Ukraine situation unfolds in the most peaceful manner possible, Lottici won’t regret his precious metals allocation. Just the opposite, as any of the aforementioned risks stands prepared to turn gold from a hedge and into a top performer.

For Gold Investors, the Glass Is Half Full

For Gold Investors, the Glass Is Half Full

As VanEck Portfolio Manager Joe Foster notes, for gold last year was a lot less disappointing than traders might have one believe. One of the best things about long-term investment in sound assets is that there is no urgent need for outperformance. And while we didn’t notch a new all-time high gold price, we got plenty of solid footing and a stage for gold to continue its climb.

Gold’s price trend in context

Perhaps the most important takeaway is that gold’s price averaged $1,250 from 2013 and 2019. In a little over a month, it will be two years since the market crash which redefined the word uncertainty. Despite a somewhat steep fall from its all-time high, gold’s price since the crash has averaged $1,817. That’s a 44% increase based on average prices. We could argue that gold’s price should be higher, given the macroeconomic conditions and ongoing uncertainty, but that’s just speculation.

The fact is that gold’s average price surged since the Covid crash.

Foster notes that gold is at historically high levels even after a year of many factors working against it.

The dollar’s effect on gold’s price

Despite a tidal wave of multi-trillion-dollar stimulus printed in the last two years, the U.S. dollar index ended 2021 up 6.4%. And perhaps because of this stimulus, the year was marked by absolutely manic risk-on investment. Equities, real estate, crypto, junk bonds, leveraged loans, SPACs, the rare whiskey index and cartoon monkey images all skyrocketed in price. This is the so-called “everything bubble,” brought to you by Federal Reserve Chairman Jerome Powell with a combination of massive money-printing and near-zero interest rates that pushed investors desperate for yield into some of the strangest corners of the market (and even invented new ones).

Well, that’s one consequence of the Fed’s actions. The other? Levels of inflation across the board that dwarf anything we’ve seen in the last 40 years. We have to go back to 1984, the tail-end of the Carter-era stagflation episode, to see anything like it.

Here’s what gold has going for it

With gold showing exceptional resilience even in such an inflationary environment, we’d do well to go over some of the things that are working in the metal’s favor. And there’s no untying them from inflation.

Foster urges anyone who thinks that gold missed an inflationary period’s upside to reconsider. There have only been two such stretches in the last 50 years, one in the 1970s and the other between 2003 and 2008. We all know what happened to gold prices after each. Unsurprisingly, both were very much characterized by the same kind of not taking inflation seriously until we have to sentiment that we’re seeing from the Fed today.

Foster thinks we’re witnessing the start of a wage/price spiral that will keep driving prices up (though arguably it’s already well underway). S&P CoreLogic Case-Shiller National Home Price Index rose 18.8% in November (latest figures) year over year. The priciest housing market in history coincides with a lack of job creation, leaving the U.S. with 21 million fewer people employed than before the Covid crash.

Foster points out that inflation-adjusted, average hourly earnings have declined by 2.7% so far this year. In an example of inflation psychology setting in, unions are negotiating to get cost-of-living adjustments (COLAs) written into their wage contracts. All this, and we’re expecting yet another year of spikes in prices of basic goods amid ongoing supply chain disruptions.

What about the Fed’s plan to raise interest rates?

As for policy, the federal government wants to print and spend more money. The Federal Reserve is taking it away. At least, they’ve threatened to take it away…

UBS analyzed the Fed’s previous three rate hiking schedules, those in 1999, 2004 and 2015. As was the case last year, gold pulled back 5%-10% six months before a hike and then gained 10%-20% after each initial hike.

It goes without saying that the fourth hiking schedule could make way for gains beyond even those. So even the most long-term gold investor should find plenty of good news for gold’s price in the year ahead.

Gold’s Growing Appeal in a World Desperate for Alternative Investments

Golds Growing Appeal in a World Desperate for Alternative Investments

As the World Gold Council’s latest report indicates, low interest rates are forcing investors to chase gains. Steady portfolio performance is desirable for regular investors and a necessity for portfolio managers. Yields on government and corporate bonds have reached all-time, mostly-negative lows worldwide. Even an alleged, tentative interest rate hiking schedule is unlikely to push real yields out of negative territory.

Yet investors, whether individual or institutional, must have return on investment. The combination of high inflation and negative real yields have pushed investments further and further into high-volatility, low-liquidity assets. That’s an issue, because in the world of finance and investing, risk and return are inextricably linked.

The WGC cites data from research firms and various sources which indicate that investors are showing more appetite for riskier assets. A recent survey suggesting that a third of portfolios might be allocated in alternative and other assets in the next three years.

Gold offers high liquidity and low volatility

Most of these “alternative” assets have a few things in common.

  • High growth potential
  • High risk
  • Low liquidity

Consider the relatively low liquidity of real estate, the growth potential of cryptocurrencies and the risk of NFTs. Consider also the lack of price discovery among assets that aren’t traded on open exchanges, or otherwise regularly marked-to-market.

During the financial crisis, liquidity was a major point of concern, and nearly half of the participants in the survey stated that it’s a key consideration in their long-term portfolio planning.

Here, gold once again starts to emerge as something that should be treated as a necessity, and likely will as investors take on an uncharacteristically aggressive approach. While it might seem as if though there is little room for defensive assets in a high-risk portfolio, the opposite holds true in the case of gold.

For starters, no prudent investor will forgo hedging their bets whatever their approach is. Bonds might have once been the hedge of choice for risk-on investment, but since it is their underperformance that is prompting the chase of returns, gold is there to assume the role.

There are many more nuances, of course. Risk and uncertainty go hand in hand with market crashes and selloffs. Last March was an infamous example, as even the safest of assets such as gold fell. In situations like these, investors want liquidity both for safety reasons and to make bargain bets in other asset classes. The same month also showed why gold continues to stand out among all other assets, as it was the only one to recover by the end of the month. And, as is by now known, it went on to post one of its best years on record.

This is just one of many occasions where diversification with gold would have assured a portfolio’s stability and maintained its performance as turbulence rocks the markets. There’s a reason it’s the gold standard of safe haven assets.

The world is looking more turbulent than it has in a while, and yet investors aren’t willing to wait and see what happens in order to post a return. During a time when things like farmland and collectibles enter portfolios that they might otherwise never find a place in, a time-proven and highly liquid asset like gold is a prime candidate to steady the rocking boat.

Gold Is the “Best Omicron Virus Defense You Can Buy”

Inoculate Your Savings Against the Omicron Virus with Gold

For the third time in as many years, governments around the world have declared a pandemic. What are we to expect, and is the virus likely to infect your portfolio? Gold pushed above $1,800 following the announcement, and not without reason. It was the conditions of last year that caused it to post a new all-time high of $2,070.

Since we’re already and again hearing the words like “lockdown” and “shutdown”, it pays to reassess the road so far. Especially considering today’s gold price is under $1800/oz.

Early last year, governments around the world shut down their economies and started printing money out of thin air to make up for it. It pays to note that most, if not all of these economies were already underperforming, nearing or having reached stagnation. There was a broad sell-off in all asset classes as the situation was unprecedented, and even gold wasn’t spared from the havoc. Nations, for that matter, were briefly selling their bullion as uncertainty peaked.

This time around, however, there is no broad selloff. But there was a marked one in stocks. After all, who wants to own stocks of companies that aren’t operating? Uncertainty is once again peaking, and it seems that gold is even better positioned to benefit from it.

Some present a short-term model that includes record low consumer spending, a lack of appetite for sending kids to school and a federal government that borrows anywhere between $2 to $5 trillion more to deal with this. The model might as well be titled “Economic Disaster”. Going back to the first half of last year, there were talks of how the global economy could take years to recover in a best-case scenario. We are either in, or steadfastly approaching, a worst-case scenario. Anyone touting economic recovery over the past two years was either easily duped or had other motives.

The companies were performing, but they were doing so in the same thin-air fashion as the economy itself, being propped up by newly-printed money handed to them. The same money printing caused inflation to spike to 6.2% this year, over three times the intended target, with projections that it will reach 9% and onwards to double digits next year. This is mostly the result of a $3 trillion stimulus.

The aforementioned model finds it plausible that the Federal Reserve alone could pump anywhere between $5 to $10 trillion more into the global banking system. That’s not counting other central banks, whose countries are also dealing with record inflation as a result of their own money printing.

Anyone who’s watching these inflation numbers soar can appreciate the value of a truly inflation-resistant investment. In a world where outrageous inflation and currency debasement are one of the few things that have emerged, physical gold is becoming less of an investment and more of a must-have household item.

Gold Approaches $1,900 While Investors Mull Fed Chair Powell’s Reappointment

Gold Approaches 1,900 While Investors Mull Fed Chair Powell Reappointment
Photo by Aaron Munoz

Although analysts expect that gold could have a very volatile closing of the year, the consensus is that the metal is eyeing $1,900 as the next level to breach in the near-term, via Kitco. Market participants are always keeping a watchful eye on the Federal Reserve, so it’s no surprise that questions over the next Fed Chair nominee have caused a bit of tumult.

Some believe that there is a strong chance that Federal Reserve Governor Lael Brainard could take Powell’s spot after recent dissatisfaction with the incumbent’s actions. A Brainard appointment would result in a major shift in short-term yields, said OANDA senior market analyst Edward Moya, along with delaying hike expectations even further.

However, Moya noted that a Powell renomination would be far from negative for gold. Risk remains to the upside, and hikes are questionable regardless of who’s helming the central bank. Pepperstone’s head of research Chris Weston said that a new Fed Chair would cause the kind of uncertainty that most market participants dislike, yet that volatility seems to be in the cards regardless. (Update: Powell was renominated to his current position on November 22. His last Senate confirmation won 84 of 100 votes in 2018, so Congressional resistance is extremely unlikely.)

Weston expects an anything-goes December, partially because the U.S. Treasury will exhaust its measures by the middle of the month as the U.S. debt ceiling issue once again comes to the forefront. The central bank’s meeting, which should announce the tapering schedule, could be another stir for the markets.

TD Securities said that gold remains vulnerable to priced-in rate hikes, even in the absence of any evidence that they will materialize. So long as this remains in view, the bank believes that gold could come under further selling, especially if prices fall below the $1,840 level. Moya expects a very volatile week ahead, saying that gold could trade in a range as wide as $1,840-$1,890.

If the metal does dip to $1,840 or below, Standard Chartered precious metal analyst Suki Cooper expects an influx of buyers on every turn due to gold’s fundamental picture. She noted that gold’s headwinds are mostly absent and not of particular consequence. On the other hand, the upside to physical gold ownership is tremendous. Growth risks, elevated inflation, an expected pullback in the U.S. dollar and real yields establishing themselves in negative territory are far more pronounced than anything pushing gold downwards.

However November’s price action plays out, Moya expects investors to start pouring into gold as an inflation hedge next month and push it above the $1,900 level. This could be expedited by both uncertainty coming from Europe or any number of data reports scheduled for this week turning out disappointing.

Inflation? Stagflation? Gold Is Fine With Either

Inflation? Stagflation? Gold is fine with either...

Gold’s price has seen some action recently, again climbing past strong resistance at $1,800 to a high of $1,813 before finishing the day above $1,790. Does this mean that market participants are finally, but very slowly, waking up to the economic reality? TD Securities’ analysts seem to think so, having initiated a $1,850 and $2,000 long call spread for gold’s price for April.

In their recent report, the commodity analysts said that inflation, stagflation and dubious tightening all play a part in the bullish forecast for the next four months. Even with nothing to support the notion, the markets still seem to be fully pricing in some kind of Federal Reserve tightening. This includes a reduction of the balance sheet, hikes and so on. This sentiment has been weighing heavily on gold over the past months, with November being the targeted date. It remains to be seen how the Fed intends to tighten its monetary policy in the current environment.

Wade Guenther, managing partner at Wilshire Phoenix, recently told Kitco that he believes the Fed won’t be able to rein in inflation. Guenther has also dismissed the idea that supply chain disruptions are being caused by consumer spending, something that has garnered quite a bit of ridicule as of late, and supports a far more grounded view that the cause is across-the-board inflation.

With the ever-hawkish Fed Chair Jerome Powell going as far as to admit that these disruptions could persist well into next year, it’s turning inflation into an even bigger problem, and also a worldwide one. In Canada, the latest report on consumer prices showed that they have risen to their highest level in more than a decade.

As TD Securities’ analysts noted, this is part of why stagflation is becoming a greater concern with every passing week. The threat of energy prices rising has turned into what the analysts call a global energy crisis, one that seems to be intensifying. There is also much to be said about crumbling economies, an issue that everyone seems to be ignoring right now. With hyperinflation being mentioned on one end and parallels being drawn with the Great Depression on the other, we might yet see the term stagflation redefined.

Another interesting bit of information is that speculators have, mostly based on optimistic sentiment, liquidated more than 190 tons of paper gold this year. Yet the massive dump, as opposed to slicing the metal’s price, only seems to have thwarted its rise for the time being.

Regardless of whether we see inflation or stagflation, TD Securities says that the conflux of factors appears to have primed the gold market for a very strong move upwards by early next year. In the shorter term, Saxo Bank’s head of commodity strategy Ole Hansen said that a breakout above $1,835 could move a lot of interest away from the stock market and into gold.

Inflation, Other Forces Will Continue to Push Gold Higher

Inflation, Other Forces Will Continue to Push Gold Higher

As Forbes contributor Frank Holmes points out, two weeks ago, the greenback hit its highest level in about a year. It beat a basket of other currencies in doing so, and once again showed strength against expectations. But was it a show of strength on the U.S. dollar’s part, or a show of weakness on the part of foreign currencies?

We’ve mentioned in the past that gold has been hitting all-time highs in currencies around the world heading up to 2019. Only when it comes to the greenback has its rise been slow, last year notwithstanding. And sure enough, checking the gold market’s price action in dollar denominations shows a familiar correlation: dollar up, gold down.

Dollar’s effect on gold’s price

Yet simple logic demonstrates that gold has little to worry about regarding dollar strength. With trillions of U.S. dollars printed last year, it’s questionable where that strength is coming from and how long it can persist.

Interestingly, despite the dollar’s relative strength recently, oil’s price has skyrocketed over the last few months. Americans notice at the gas pump when filling their tanks. However, oil price has much more far-reaching consequences than an extra $20 spent at the convenience store. Higher oil prices mean higher transportation prices, driving up costs of everything from fresh foods to imported manufactured goods.

Which leads us directly into the highest inflation in the last 30 years…

The Fed is losing control of inflation

The Federal Reserve has done nothing but downplay the threat of inflation so far. The PCE index, which monitors the prices of goods and services purchased by U.S. consumers, rose by 4.3% year-on-year in August. It was the ninth straight month of massively surging inflation, and the highest figure in the last 30 years.

It just so happens that the PCE index is the Fed’s preferred measure of inflation, which might explain why Fed Chair Jerome Powell voiced expectations of ongoing market disruptions, which are intrinsically tied to inflation, well into next year. Quite a statement for someone promising to embark on a major tightening program next month.

As just one example of the kind of damage that inflation is doing, home prices, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.7% in the year ended July 2021. Hearing that it’s the highest annual rise since 1987 is troubling. Learning that the index started in 1987 really puts this number into perspective.

The dollar’s role in determining gold’s price

One of the key points of Trump’s presidential tenure was an ongoing back-and-forth with the Federal Reserve over various things, with the greenback being near the top of the list. President Trump wanted a weaker dollar for trade purposes, often saying that China’s devaluation of the yuan is continuing to give the nation a trade advantage.

Holmes notes that while a strong dollar might sound good on paper, it’s actually harming U.S. exporters, and it’s doing so during a time when no nation can afford to have economic weakness.

How this plays out remains to be seen. And while we wait for gold to truly respond to any of these tailwinds, it’s good to remind ourselves just how liquid of an asset gold is during a time when cryptocurrencies are taking their place on the global market.

While Holmes often tells people that gold is the fourth most liquid asset, the latest World Gold Council data shows that it’s actually the second, coming only behind S&P 500 stocks. Its daily trading volume beats all commodities, government and corporate debt and even currency swaps. Even amid bouts of tepid price action, the gold market itself is as action-packed as they come.